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Distance, information asymmetry, and mergers: evidence from Canadian firms

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  • Nilanjan Basu
  • Mathieu Chevrier
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    Abstract

    Purpose – The purpose of this paper is to examine the impact of the distance between the acquiror and the target on merger outcomes. Design/methodology/approach – The authors use the distance between acquiror and target headquarters for a sample of 134 Canadian mergers to proxy for the impact of information asymmetry due to distance. They use an ordinary least squares regression to examine the impact of this distance on the abnormal returns earned by the acquiror and the operating performance of the acquiror. They also use a logistic regression to test for the impact of distance on the choice of the medium of exchange. Findings – The results suggest that a larger distance between the acquiror and the target is related to lower abnormal returns for the acquiror, poorer post-merger operating performance, as well as to a greater use of stock as the medium of exchange. The results are robust to several alternate specifications. Research limitations/implications – The findings of this paper extend existing research that suggests that distance affects investment decisions. Moreover, by analyzing the choice of the medium of exchange, this paper provides evidence that indicates that the distance matters due to its impact on information. As such, the paper suggests a potential empirical approach to measuring information asymmetry. Future research could help us better understand the role of distance in various other aspects of corporate decision making. Originality/value – This paper, by analyzing a sample of Canadian firms, provides an out-of-sample test for prior research that has focused almost exclusively on US firms. Moreover, by looking at the choice of the medium of exchange, it provides direct evidence that distance affects corporate decision making.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Managerial Finance.

    Volume (Year): 37 (2011)
    Issue (Month): 1 (January)
    Pages: 21-33

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    Handle: RePEc:eme:mfipps:v:37:y:2011:i:1:p:21-33

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    Related research

    Keywords: Acquisitions and mergers; Canada; Corporate finances;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. DeLong, Gayle L., 2001. "Stockholder gains from focusing versus diversifying bank mergers," Journal of Financial Economics, Elsevier, vol. 59(2), pages 221-252, February.
    2. Alessandrini, Pietro & Calcagnini, Giorgio & Zazzaro, Alberto, 2008. "Asset restructuring strategies in bank acquisitions: Does distance between dealing partners matter?," Journal of Banking & Finance, Elsevier, vol. 32(5), pages 699-713, May.
    3. Black, Fischer, 1974. "International capital market equilibrium with investment barriers," Journal of Financial Economics, Elsevier, vol. 1(4), pages 337-352, December.
    4. Saeyoung Chang, 1998. "Takeovers of Privately Held Targets, Methods of Payment, and Bidder Returns," Journal of Finance, American Finance Association, vol. 53(2), pages 773-784, 04.
    5. Eckbo, B. Espen & Thorburn, Karin S., 2000. "Gains to Bidder Firms Revisited: Domestic and Foreign Acquisitions in Canada," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(01), pages 1-25, March.
    6. Solnik, B H, 1974. "The International Pricing of Risk: An Empirical Investigation of the World Capital Market Structure," Journal of Finance, American Finance Association, vol. 29(2), pages 365-78, May.
    7. Huberman, Gur, 2001. "Familiarity Breeds Investment," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 659-80.
    8. Christa H. S. Bouwman & Kathleen Fuller & Amrita S. Nain, 2009. "Market Valuation and Acquisition Quality: Empirical Evidence," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 633-679, February.
    9. Mark S. Seasholes & Ning Zhu, 2010. "Individual Investors and Local Bias," Journal of Finance, American Finance Association, vol. 65(5), pages 1987-2010, October.
    10. Ming Dong & David Hirshleifer & Scott Richardson & Siew Hong Teoh, 2006. "Does Investor Misvaluation Drive the Takeover Market?," Journal of Finance, American Finance Association, vol. 61(2), pages 725-762, 04.
    11. Christopher J. Malloy, 2005. "The Geography of Equity Analysis," Journal of Finance, American Finance Association, vol. 60(2), pages 719-755, 04.
    12. Fishman, Michael J, 1989. " Preemptive Bidding and the Role of the Medium of Exchange in Acquisitions," Journal of Finance, American Finance Association, vol. 44(1), pages 41-57, March.
    13. Amihud, Yakov & DeLong, Gayle L. & Saunders, Anthony, 2002. "The effects of cross-border bank mergers on bank risk and value," Journal of International Money and Finance, Elsevier, vol. 21(6), pages 857-877, November.
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